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A Few Things the Fed Has Done Right

The Fed's plan to maintain a large balance sheet and pay interest on bank reserves is good for financial stability.

By

John H. Cochrane

Aug. 21, 2014 7:11 p.m. ET

As Federal Reserve officials lay the groundwork for raising interest rates, they are doing a few things right. They need a little cheering, and a bit more courage of their convictions.

The Fed now has a huge balance sheet. It owns about $4 trillion of Treasury bonds and mortgage-backed securities. It owes about $2.7 trillion of reserves (accounts banks have at the Fed), and $1.3 trillion of currency. When it is time to raise interest rates, the Fed will simply raise the interest it pays on reserves. It does not need to...